Educational Articles

A Bright Future for the Lightweight Metal

Frederick L. Harris, III
| April 21, 2010

During 2008 and the first part of 2009, a severe economic downturn gripped the United States and other parts of the globe. To add more fuel to the fire, a crisis in the banking sector made it quite a challenge for companies to obtain financing. Consequently, the price of aluminum plummeted to dismally low levels. To deal with this situation, companies in the aluminum industry took a variety of actions to improve their cost structure and boost liquidity, including production curtailments, divestitures of non-strategic assets, the suspension of share repurchase programs, and dividend cuts.

But fortunes for the lightweight metal have taken a turn for the better since then, arising partially from better demand from certain end markets, including autos and commercial transportation (although it may take a while longer for demand in other areas, such as construction and aerospace, to perk up). As a result, companies in the aluminum industry have been restarting some projects that were idled when business conditions deteriorated.

We are upbeat about aluminum prices over the long term. One major reason for our belief is that developing nations, including China, India, and Brazil, have been rising in prominence on the world stage. As these nations face increased requirements for infrastructure, demand for the lightweight metal ought to rise at a decent rate. Efforts by the United States and other industrialized nations to jump-start their flagging economies via stimulus measures also augur well for future aluminum prices.

Another factor that ought to help aluminum is its environmental benefits, since ``going green’’ has been receiving greater government attention. For example, as automakers have faced mounting pressure from regulators to improve safety, enhance fuel efficiency, and reduce emissions, they have focused on the lightweight metal, which is about as durable as steel (another major component in automobiles). Other industries that stand to experience increased use of aluminum as a result of that trend include housing and aerospace.

Companies that benefit the most from favorable pricing trends in the aluminum industry is producers, such as Alcoa (AA), boasting sales of around $18 billion annually. That company recently formed a joint venture in Saudi Arabia to work on a project that will include an aluminum smelter, with initial production of 740,000 metric tons per year (mtpy), and an alumina refinery, with initial output of 1.8 million mtpy.

Also in Saudi Arabia, Aluminum Corporation of China, generating annual revenues of roughly $10 billion, has entered into a joint-venture agreement to construct a primary aluminum smelter with capacity of one million mtpy. What’s more, that company formed a pact to develop a smelter in Malaysia, with initial output of 330,000 mtpy, eventually increasing to 1.3 million mtpy. Meanwhile, in Brazil, Alumina, with sales of about $3 billion annually, completed a 2.1 million mtpy expansion of the Alumar alumina refinery, and a 2.6 million mtpy alumina mine should be on stream soon.

It is important to mention that although we have an upbeat, long-term view on aluminum prices, fluctuations will occur, from time to time. Factors that could contribute to volatility may involve, among other things, expectations for supply and demand, the level of global inventories, and the influence of hedge funds and other financial investment funds participating in the commodity markets.